April issue 2002

Pakistani stocks are soaring. The Karachi Stock Exchange (KSE), helped along by a host of positive macro-economic policies, has emerged this fiscal quarter, as the number one performing stock market in the world, much to the surprise of local and foreign analysts wary of adverse political stability and deteriorating law and order indicators.  Cautious analysis notwithstanding, investor confidence is returning to the region, encouraged by returns as high as 40 per cent.  The market is on a two-year high, trading approximately 200 million shares a day.

Prudent governance has made a significant mark with foreign exchange reserves crossing the five billion dollar mark and the rupee appreciating against the dollar.  In addition the Paris Club rescheduling of Pakistan’s debt payments provided the ailing economy with a much needed reprieve, while the re-initiation of the government’s privatisation plans has renewed international confidence.  Market players will soon witness the listing of some state-run assets like Habib Bank Ltd., United Bank Ltd., Pakistan Oilfields and National Bank of Pakistan in a move designed to deepen the capital market.  Pakistan has been able to negotiate debt rescheduling of 12.5 billion dollars on the concessionary Naples terms. Strong capital inflows have also served to sustain the currency with the rupee appreciating 5.3 per cent.

However, this entry into the bullish zone was checked in the second quarter of the fiscal year by the attack on the Indian parliament which was blamed on Pakistani-bred militants.  The subsequent troop build-up along the Line of Control, and the threat of impending war, averted by timely intervention of the US Secretary of State, Colin Powell, led to a significant outflow of investment from the region.   Analysts point to President Pervez Musharraf’s strong stance against militant organisations as a cardinal reason for improved market confidence.  A volley of bullish rallies sent the index soaring by almost 400 points, with market capitalisation and share values reaching highs of 400 billion rupees.

New Yorker, Farrukh Sabzwari, VP Emerging Markets — CLSA, attributes Pakistan’s re-emergence in the international fold to mature governance. “Pakistan’s stance on the war in Afghanistan, and the expected pay-off in the form of debt-forgiveness and rescheduling has provided the economy with some breathing space,” says Sabzwari.  “The country appears to have come out of the Afghan conflict as a mature and responsible nation. What else can explain the crackdown on fundamentalists, something which had never been attempted before?” Zubeida Mirza, head of research, First Capital Securities, echoes this sentiment.  “In one brief quarter, Pakistan has emerged from the global backwaters to a frontline position due to its stance on the war against terror. This was instrumental in turning around Pakistan’s economic fundamentals.”

With pressure on the currency easing, the State Bank has relaxed monetary policy, reducing the discount rate from 14 per cent to 9 per cent. This move provided a much needed impetus for the ailing domestic economy.   This sharp cut in interest rates combined with the depreciation of the dollar has left very little reason for private investment to remain aloof.  Money has started flowing into the KSE lured by the attraction of 20-40 per cent dividend yields.  On another positive note, foreign selling which could have acted as a serious damper on the domestic economy, has been contained.  Whilst some speculative gains have been made on Pakistani exposure, the amounts involved have not been significant and mainly restricted to large liquid scrips like Fauji, PSO and Hubco.

However, despite the recent reforms, foreign investment still remains wary.  Most foreign fund houses are reluctant to invest in a stock market where the capital base is below the 10 billion dollar level. Pakistan had been virtually erased from the trading screens of numerous overseas fund managers during the civilian administrations of Benazir Bhutto and Nawaz Sharif, due to rampant corruption and instability.  The foreign fund holdings in Pakistani equities therefore fell to a low of 100 million dollars down from a high of 2 billion dollars in 1994.

“Recent approval of loans from the IMF and the Paris Club rescheduling have been the most important achievements of the past decade. These developments have created some much needed fiscal space for the government to jumpstart the slowing rupee-based economy,” says Arshad Arif, head of research at AKD Securities.  “A recovery seems to be in the offing.  With a stable rupee and low interest rates, a process of de-dollarisation has finally started.”  Attracted by local investment, the dollar saving habits of the general public have changed favourably.  Equities are the flavour of the season, with market recovery backed by massive retail flows.  Arif is more confident than some of his overseas counterparts.  “I think the market can sustain its rally.  Given the existing valuations vis-à-vis regional comparisons, we expect even foreign investors to participate.  I’m definitely bullish and see the market crossing 2000 in 2002,” he predicts.  However, foreign analysts are less optimistic and feel the rally has reached its peak.  “Nearly all the corrective measures of the first half of the financial year have been built into pricing.  There are at best about 100-150 points left in the rally,” maintains Zubeida Mirza.

The key driver for that elusive 100-150 point rally lies in the hands of the Privatisation Commission.  With UBL due to be sold in April and PTCL scheduled for June 2002, there is room for a further upside.  All the available data, therefore, indicates that the stock market may yet be in for its best ride ever.